Colombia’s Dollar Bonds Drop After S&P Cuts Nation to Junk

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Colombia’s dollar bonds dropped and the peso led losses among emerging-market currencies after S&P Global Ratings cut the country’s credit rating to junk amid a political crisis and mass unrest.

The nation’s dollar-denominated bonds due 2031 dropped 0.4% to 96.7 cents in early New York trading Thursday, sending their spread over U.S. Treasuries up to 1.84 percentage points. The peso weakened 2% to 3,760 per dollar.

S&P cut Colombia’s sovereign rating one notch to BB+ on Wednesday, after the government’s plan to raise taxes to curb the deficit was blocked by congress and mass street protests in recent weeks.

The cost of insuring the nation’s bonds against default with five-year credit default swaps rose to the most since October, as investors see the country as increasingly risky.

A bill to increase taxes introduced last month triggered widespread civil disorder and the resignation of the finance minister, and was even opposed by President Ivan Duque’s own party. Even after the bill was withdrawn, highway blockades and street demonstrations have continued across the nation over a range of other grievances.

Colombia is still rated at the lowest level of investment grade by Fitch Ratings and two levels above junk by Moody’s Investors Service.

Read More: Fallen-Angel History Shows Colombia’s Fear of Junk Is Misguided

Worst Performers

Colombian assets have weakened over the past month as investors priced in the increased likelihood of a downgrade. The nation’s dollar bonds are the worst performers in Latin America after El Salvador since the tax bill was introduced.

S&P said that its stable outlook for Colombia “incorporates our expectation for an institutional solution to recent and significant social unrest.”

The nation’s fiscal deficit will widen to 8.6% of gross domestic product this year according to the government’s forecast, from 2.5% in 2019.

“Colombia’s rating fundamentals remain weaker than those of similarly rated peers,” S&P said. At the same time, the country’s flexible credit line with the International Monetary Fund, adequate access to international debt markets, and a credible monetary policy mitigate external risks and support Colombia’s creditworthiness, S&P said.

Analyst Reactions

“The timing was earlier than expected, and others are likely to follow,” wrote Citi Research analysts including Esteban Tamayo. “The performance of the Colombia credit spreads will depend crucially on the timing of the second downgrade below investment grade.”

When that happens, the amount of forced selling will be around $1 billion to $1.5 billion, which is “not excessive”, Citi wrote. “We believe the best buying opportunity comes right after the second downgrade.”

S&P’s decision wasn’t a big surprise, since it is increasingly difficult in Colombia to pass tax reforms, said Michel Janna, a former Director of Public Credit. The country needs to pass a less ambitious tax bill, which at least addresses some of the more pressing fiscal problems, to prevent Fitch and Moody’s from following S&P’s move in the near future, Janna said in an audio message.

“The recent situation of political and social instability could have accelerated the decision because it makes it more difficult to reach a consensus that leads to an increase in tax revenue,” said Camilo Perez, chief economist at Banco de Bogota, in a phone interview.

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